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"Globalization, State Sovereignty, and the 'Endless' Accumulation of Capital"

by Giovanni Arrighi (

© Fernand Braudel Center 1997.

(Revised version of a paper presented at the Conference on "States and Sovereignty in the World Economy," University of California, Irvine, Feb. 21-23, 1997. I would like to thank Beverly Silver, David Smith, Dorie Solinger and Steven Topik for very useful comments on the earlier version of the paper.)

"Times of change," remarks John Ruggie, "are also times of confusion. Words lose their familiar meaning, and our footing becomes unsure on what was previously familiar terrain" (1994: 553). As we seek a firmer footing in seemingly well established notions, as Stephen Krasner (1997) does with "sovereignty," we discover that their past use is itself mired in hopeless confusion. And as we coin new terms, such as "globalization," to capture the novelty of emergent conditions, we compound the confusion by carelessly pouring old wine in new bottles. The purpose of this chapter is to show that in order to isolate what is truly new and anomalous in ongoing transformations of world capitalism and state sovereignty, we must preliminarily recognize that key aspects of these transformations are either not new at all or are new in degree but not in kind.

I shall begin by arguing that much of what goes under the catch-word "globalization" has in fact been a recurrent tendency of world capitalism since early-modern times. This recurrence makes the dynamics and likely outcome(s) of present transformations more predictable than they would be if globalization were as novel a phenomenon as many observers think. I shall then shift my focus on the evolutionary pattern that has enabled world capitalism and the underlying system of sovereign states to become, as Immanuel Wallerstein (1997) puts it, "the first historical system to include the entire globe within its geography." My contention here will be that the true novelty of the present wave of globalization is that this evolutionary pattern is now at an impasse. I shall conclude by speculating on possible ways out of this impasse and on the kinds of new world order that may emerge as a result of the recentering on East Asia of world-scale processes of capital accumulation.


As critics of the notion of globalization have pointed out, many of the tendencies that go under that name are not new at all. The newness of the so-called "information revolution" is impressive, "but the newness of the railroad and the telegraph, the automobile, the radio, and the telephone in their day impressed equally" (Harvey 1995: 9). Even the so-called "virtualization of economic activity" is not as new as it may appear at first sight.

Submarine telegraph cables from the 1860s onwards connected inter-continental markets. They made possible day-to-day trading and price-making across thousands of miles, a far greater innovation than the advent of electronic trading today. Chicago and London, Melbourne and Manchester were linked in close to real time. Bond markets also became closely interconnected, and large-scale international lending- -both portfolio and direct investment--grew rapidly during this period. (Hirst 1996: 3)

Indeed, foreign direct investment (FDI) grew so rapidly that in 1913 it amounted to over 9 percent of world output--a proportion still unsurpassed in the early 1990s (Bairoch and Kozul-Wright 1996: 10). Similarly, the openess to foreign trade--as measured by imports and exports combined as a proportion of GDP--was not markedly greater in 1993 than in 1913 for all major capitalist countries except the United States (Hirst 1996: 3-4).

To be sure, as the chapters by Eric Helleiner (1997) and Saskia Sassen (1997) underscore from different perspectives, the most spectacular expansion of the last two decades, and the strongest piece of evidence in the armory of advocates of the globalization thesis, has not been in FDI or world trade but in world financial markets. "Since 1980"--notes Saskia Sassen--"the total value of financial assets has increased two and a half times faster than aggregate GDP of all rich industrial economies. And the volume of trading in currencies, bonds and equities has increased five times faster." The first to "globalize" and today "the biggest and in many ways the only true global market" is the foreign exchange market. "Foreign exchange transactions were ten times larger than world trade in 1983; only ten years later, in 1992, they were sixty times larger" (1996: 40). In the absence of this explosive growth in world financial markets, we would probably not be speaking of globalization, and certainly not as a departure from the ongoing process of world-market reconstruction launched under US hegemony in the wake of the Second World War. After all,

Bretton Woods was a global system, so what really happened here was a shift from one global system (hierarchically organized and largely controlled politically by the United States) to another global system that was more decentralized and coordinated through the market, making the financial conditions of capitalism far more volatile and far more unstable. The rhetoric that accompanied this shift was deeply implicated in the promotion of the term "globalization" as a virtue. In my more cynical moments I find myself thinking that it was the financial press that conned us all (myself included) into believing in "globalization" as something new when it was nothing more than a promotional gimmick to make the best of a necessary adjustment in the system of international finance. (Harvey 1995: 8)

Gimmick or not, the idea of globalization was from the start intertwined with the idea of intense interstate competition for increasingly volatile capital and a consequent tighter subordination of most states to the dictates of capitalist agencies. Nevertheless, it is precisely in this respect that present tendencies are most reminiscent of the belle epoque of world capitalism of the late nineteenth and early twentieth centuries. As Sassen herself acknowledges,

In many ways the international financial market from the late 1800s to World War I was as massive as today's.... The extent of the internationalization can be seen in the fact that in 1920, for example, Moody's rated bonds issued by about fifty governments to raise money in the U.S. capital markets. The Depression brought on a radical decline in this internationalization, and it was only very recently that Moody's once again rated the bonds of as many governments. (1996: 42-3)

In short, careful advocates of the globalization thesis concur with critics in seing present transformations as not novel except for their scale, scope and complexity. As I have argued and documented elsewhere (Arrighi 1994), however, the specificities of present transformations can be fully appreciated only by lengthening the time horizon of our investigations to encompass the entire lifetime of world capitalism. In this longer perspective, "financialization," heightened interstate competition for mobile capital, rapid technological and organizational change, state breakdowns and an unusual instability of the economic conditions under which states operate--taken individually or jointly as components of a particular temporal configuration, these are all recurrent aspects of what I have called "systemic cycles of accumulation."

In each of the four systemic cycles of accumulation that we can identify in the history of world capitalism from its earliest beginnings in late-medieval Europe to the present, periods characterized by a rapid and stable expansion of world trade and production invariably ended in a crisis of overaccumulation that ushered in a period of heightened competition, financial expansion, and eventual breakdown of the organizational structures on which the preceding expansion of trade and production had been based. To borrow an expression from Fernand Braudel (1984: 246)--the inspirer of the idea of systemic cycles of accumulation--these periods of intensifying competition, financial expansion and structural instability are nothing but the "autumn" of a major capitalist development. It is the time when the leader of the preceding expansion of world trade reaps the fruits of its leadership by virtue of its commanding position over world-scale processes of capital accumulation. But it is also the time when that same leader is gradually displaced at the commanding heights of world capitalism by an emerging new leadership. This has been the experience of Britain in the late nineteenth and early twentieth centuries, of Holland in the eighteenth century, and of the Genoese capitalist diaspora in the second half of the sixteenth century. Could it also be the experience of the United States today?

At the moment the most prominent tendency is for the United States to reap the fruits of its leadership of world capitalism in the Cold War era. Indeed, various aspects of the seeming global triumph of Americanism that ensued from the demise of the USSR are themselves widely held to be signs of globalization. The most widely recognized signs are the global hegemony of US popular culture and the growing importance of agencies of world governance that are influenced disproportionately by the United States and its closest allies, such as the UN Security Council, NATO, the Group of Seven (G-7), the IMF, the IBRD and the WTO. Less widely recognized but also significant is the ascendance of a new legal regime in international business transactions dominated by US law firms and Anglo-American conceptions of business law (Sassen 1996: 12-21).

The importance of these signs of a further Americanization of the world should not be belittled. But it should not be exaggerated either, particularly for what concerns US capabilities to continue to shape and manipulate to its own advantage the organizational structures of the world capitalist system. The chances are that the victory of the United States in what Fred Halliday (1983) has called the Second Cold War and the further Americanization of the world will appear in retrospect as closing moments of US world hegemony, just as Britain's victory in the First World War and the further expansion of its overseas empire were preludes to the final demise of British world hegemony in the 1930s and 1940s. As we shall see in section III, there are good reasons for expecting the demise of US hegemony to follow a different trajectory than the demise of British hegemony. But there are equally good reasons for expecting the present, US-led phase of financial expansion to be a temporary phenomenon, like the analogous British-led phase of a century ago.

The most important reason is that the present belle epoque of financial capitalism, no less than all its historical precedents--from Renaissance Florence to Britain's Edwardian era, through the Age of the Genoese and the periwig period of Dutch history--is based on massive, system-wide redistributions of income and wealth from all kinds of communities to capitalist agencies. In the past, redistributions of this kind engendered considerable political, economic and social turbulence. At least initially, the organizing centers of the preceding expansion of world trade and production were best positioned to master, indeed, to benefit from the turbulence. Over time, however, the turbulence undermined the power of the old organizing centers, and prepared their displacement by new organizing centers endowed with the capacity to promote and sustain a new major expansion of world trade and production (Arrighi 1994).

Whether any such new organizing centers are today emerging under the glitter of the US-led financial expansion remains unclear, as we shall see. But the effects of the turbulence engendered by the present financial expansion have begun to worry even the promoters and boosters of economic globalization. David Harvey (1995: 8, 12) quotes several of them remarking that globalization is turning into "a brakeless train wreaking havoc," and worrying about a "mounting backlash" against the effects of such a destructive force, first and foremost "the rise of a new brand of populist politicians" fostered by the "mood... of helplessness and anxiety" that is taking hold even of wealthy countries. More recently, the Hungarian-born cosmopolitan financier George Soros has joined the chorus by arguing that the global spread of laissez-faire capitalism has replaced Communism as the main threat to open democratic society.

Although I have made a fortune in the financial markets, I now fear that untrammeled intensification of laissez-faire capitalism and the spread of market values to all areas of life is endangering our open and democratic society. The main enemy of the open society, I believe, is no longer the communist but the capitalist threat.... Too much competition and too little cooperation can cause intolerable inequities and instability.... The doctrine of laissez-faire capitalism holds that the common good is best served by the uninhibited pursuit of self-interest. Unless it is tempered by the recognition of a common interest that ought to take precedence over particular interests, our present system... is liable to break down. (Soros 1997: 45, 48)

In reporting the proliferation of writings along Soros' lines, Thomas Friedman--the early booster of the idea of globalization as virtue who later invented the "brakeless train" metaphor-- reiterates the view that "the integration of trade, finance and information that is creating a single global market and culture" is inevitable and unstoppable. But while globalization cannot be stopped--he hastens to add--"there are two things that can be done to it," presumably for its own good: "We can go faster or slower.... And we can do more or less to cushion [its] negative effects" (1997: I, 15).

There is much deja vu in these diagnoses of the self- destructiveness of unregulated processes of world-market formation and related prognoses of what ought to be done to remedy such self- destructiveness. Soros himself compares the present age of triumphant laissez-faire capitalism with the similar age of a century ago. In his view the earlier age was, if anything, more stable than the present, because of the sway of the gold standard and the presence of an imperial power, Britain, prepared to dispatch gunboats to faraway places to maintain the system. And yet the system broke down under the impact of the two World Wars and the intervening rise of "totalitarian ideologies." Today, in contrast, the United States is reluctant to be the policeman of the world "and the main currencies float and crush against each other like continental plates," making the breakdown of the present regime much more likely "unless we learn from experience." (1997: 48).

Our global open society lacks the institutions and mechanisms necessary for its preservation, but there is no political will to bring them into existence. I blame the prevailing attitude, which holds that the unhampered pursuit of self- interest will bring about an eventual international equilibrium.... As things stand, it does not take very much imagination to realize that the global open society that prevails at present is likely to prove a temporary phenomenon. (Soros 1997: 53-4)

Soros makes no reference to his fellow countryman Karl Polanyi's now classic account of the rise and demise of nineteenth- century laissez-faire capitalism. Nevertheless, anyone familiar with that account cannot help but be struck by its anticipation of present arguments about the contradictions of globalization (on the continuing significance of Polanyi's analysis for an understanding of the present wave of globalization, see among others Mittelman 1996). Like Friedman, Polanyi saw a slow-down in the rate of change as the best way of keeping change going in a given direction without causing social disruptions that would result in chaos rather than change. He also underscored that only a cushioning of the disruptive effects of market regulation can prevent society from revolting in self-defense against the market system (1957: 3-4, 36-8, 140-50). And like Soros, Polanyi dismissed the idea of a self-adjusting (global) market as "a stark utopia." He argued that no such institution can exist for any length of time "without annihilating the human and natural substance of [world] society." In his view, the only alternative to the disintegration of the world market system in the interwar years "was the establishment of an international order endowed with an organized power which would transcend national sovereignty"--a course, however, that "was entirely beyond the horizons of the time" (1957: 3-4, 20-22).

Neither Soros nor Polanyi provide an explanation of why the still dominant world power of their respective times--the United States today, Britain in the late nineteenth and early twentieth centuries--stubbornly stuck to and propagated the belief in a self- adjusting global market in spite of accumulating evidence that unregulated markets (unregulated financial markets in particular) do not produce "equilibria" but disorder and instability. Underlying such stubborness we can nonetheless detect the predicament of a declining hegemonic agency that has become overly dependent, for profits as much as for power, on a process of widening and deepening integration of world trade and finance that the hegemonic agency at the height of its power promoted and organized, but the orderly development of which it can no longer ensure. It is as if the declining hegemonic power can neither afford to jump off the "brakeless train" of unregulated financial speculation, nor reroute the train into a less self-destructive groove.

Historically, the rerouting of world capitalism into a more creative than destructive groove has been premised upon the emergence, to borrow an expression from Michael Mann (1986: 28), of new "tracklaying vehicles." That is to say, the expansion of world capitalism to its present global dimensions has not proceeded along a single track laid once and for all some five hundred years ago. Rather, it has proceeded through several switches to new tracks that did not exist until specific complexes of governmental and business agencies developed the will and the capacity to lead the entire system in the direction of broader or deeper cooperation. The world hegemonies of the United Provinces in the seventeenth century, of the United Kingdom in the nineteenth century, and of the United States in the twentieth century have all been tracklaying vehicles of this kind (cf. Taylor 1994: 27). In leading the system in a new direction, they also transformed it. And it is on these successive transformations that we must focus in order to identify the true novelties of the present wave of financial expansion.


The formation of a capitalist world system, and its subsequent transformation from being a world among many worlds to becoming the historical social system of the entire world, have been based upon the construction of territorial organizations capable of regulating social and economic life and of monopolizing means of coercion and violence. These territorial organizations are the states whose sovereignty is said to be undermined by the present wave of financial expansion. In reality, most members of the interstate system never had the powers that states are said to be losing under the impact of the present wave of financial expansion; and even the states that had those powers at one time did not have them at another time.

In any event, waves of financial expansion are engendered by a double tendency. On the one hand, capitalist organizations respond to the overaccumulation of capital over and above what can be reinvested profitably in established channels of trade and production by holding in liquid form a growing proportion of their incoming cash flows. This tendency creates what we may call the "supply conditions" of financial expansions--an overabundant mass of liquidity that can be mobilized directly or through intermediaries in speculation, borrowing and lending. On the other hand, territorial organizations respond to the tighter budget constraints that ensue from the slow-down in the expansion of trade and production by competing intensely with one another for the capital that accumulates in financial markets. This tendency creates what we may call the "demand conditions" of financial expansions. All financial expansions, past and present, are the outcome of the combined if uneven development of these two complementary tendencies (Arrighi 1997).

We are all very impressed, and rightly so, by the astronomical growth of capital that seeks valorization in world financial markets and by the intense competition that sets states against one another in an attempt to capture for their own pursuits a fraction of that capital. We should nonetheless be aware of the fact that at the roots of this astronomical growth there lies a basic scarcity of profitable outlets for the growing mass of profits that accumulates in the hands of capitalist agencies. This basic scarcity makes the pursuit of profit by capitalist agencies as dependent on the assistance of states as states are dependent in the pursuit of their own objectives on capitalist agencies. We should not be surprised, therefore, if some states are empowered rather than disempowered by the financial expansion. As Eric Helleiner (1997) notes, states in East Asia have been immune from the kind of pressures that have driven states elsewhere to "deregulate" their domestic financial systems to attract capital. And Richard Stubbs (1997) points out how, in the wake of the G-7 Plaza Accord of 1985, ASEAN states have been literally flooded by capital seeking investment within their domains--a development that has increased rather than decreased their freedom of action vis-a- vis external forces, both economic and political. The scramble of African, Latin American, Eastern European, Western European, North American and Australasian states for mobile capital has thus been accompanied by a scramble of mobile capital for a seat on the bandwagon of the East and Southeast Asian economic expansion.

We shall discuss the significance of this East and Southeast Asian exceptionalism in the concluding section of the chapter. For now let us simply underscore that past financial expansions, no less than the present, have all been moments of disempowerment of some states--including, eventually, the states that had been the tracklaying vehicles of world capitalism in the epochs that were drawing to a close--and simultaneous empowerment of other states, including the states that in due course became the new tracklaying vehicles of world capitalism. Here lies the main significance of systemic cycles of accumulation. For these cycles are not mere cycles. They are also stages in the formation and gradual expansion to its present global dimensions of the world capitalist system.

This process of globalization has occurred through the emergence at each stage of organizing centers of greater scale, scope and complexity than the organizing centers of the preceding stage. In this sequence, city-states like Venice and transnational business diasporas like the Genoese were replaced at the commanding heights of the world capitalist system by a proto-nation-state like Holland and its chartered companies, which were then replaced by the British nation-state, formal empire and world-encompassing informal business networks, which were in their turn replaced by the continent-sized United States, its panoply of transnational corporations and its far flung networks of quasi-permanent overseas military bases. Each replacement was marked by a crisis of the territorial and non-territorial organizations that had led the expansion in the preceding stage. But it was marked also by the emergence of new organizations with even greater capabilities to lead world capitalism into renewed expansion than the displaced organizations (Arrighi 1994: 13-16, 74-84, 235-8, 330-1).

There has thus been a crisis of states in each financial expansion. As Robert Wade (1996) has noted, much of recent talk about globalization and the crisis of "nation-states" simply recycles arguments that were fashionable hundred years ago (see also Lie 1996: 587). Each successive crisis, however, concerns a different kind of state. A hundred years ago the crisis of "nation-states" concerned the states of the old European core relative to the continent-sized states that were forming on the outer perimeter of the Eurocentric system, the United States in particular. The irresistible rise of US power and wealth, and of Soviet power, though not wealth, in the course of the two World Wars and their aftermath, confirmed the validity of the widely held expectation that the states of the old European core were bound to live in the shadow of their two flanking giants, unless they could themselves attain continental dimension. The present crisis of "nation-states," in contrast, concerns the giant states themselves.

The sudden collapse of the USSR has both clarified and obscured this new dimension of the crisis. It has clarified the new dimension by showing how vulnerable even the largest, most self-sufficient, and second-greatest military power had become to the forces of global economic integration. But it has obscured the true nature of the crisis by provoking a general amnesia about the fact that the crisis of US world power preceded the breakdown of the USSR and, with ups and downs, has outlasted the end of the Cold War. In order to identify the true nature of the crisis of the giant states that have been dominant in the Cold War era we must distinguish it from the long-term curtailment of national sovereignty that the globalization of the system of sovereign states has entailed for all but its most powerful members.

The principle that independent states, each recognizing the others' juridical autonomy and territorial integrity, should coexist in a single political system was established for the first time under Dutch hegemony by the treaties of Wetphalia. The process of globalizing the territorial organization of the world according to this principle, as Harvey (1995: 7) notes, took several centuries and a good deal of violence to complete. More important, as it often happens to political programs, Westphalian sovereignty became universal through endless violations of its formal prescriptions and major matamorphoses of its substantive meaning.

These violations and matamorphoses make eminently plausible Krasner's contention that, empirically, Westphalian sovereignty is a myth (1997). To this we should nonetheless add that it has been no more a myth than the ideas of the rule of law, the social contract, democracy, whether liberal, social or whatever, and that, like all these other myths, it has been a key ingredient in the formation and eventual globalization of the modern system of rule. The really interesting question, therefore, is not whether and how the Westphalian principle of national sovereignty has been violated. Rather, it is whether and how the principle has guided and constrained state action and, over time, the outcome of this action has transformed the substantive meaning of national sovereignty.

When it was first established under Dutch hegemony, the principle of national sovereignty was meant to regulate relations among the states of Western Europe. It replaced the idea of an imperial-ecclesiastical authority and organization operating above factually sovereign states with the idea of juridically sovereign states that rely on international law and the balance of power in regulating their mutual relations--in Leo Gross' words, "a law operating between rather than above states and a power operating between rather above states" (1968: 54-5). The idea applied only to Europe, which was thereby instituted as a zone of "amity" and "civilized" behavior even in times of war. The realm beyond Europe, in contrast, was turned into a residual zone of alternative behaviors, to which no standards of civilization applied and where rivals could simply be wiped out (Taylor 1991: 21-2).

For about 150 years after the Peace of Westphalia the system worked very well, both in ensuring that no single state would become so strong as to be able to dominate all the others and in enabling the ruling groups of each state to consolidate their domestic sovereignty. The balance of power, however, was reproduced through an endeless series of increasingly capital intensive wars and a broadening and deepening of European expansion in the non-European world. Over time, these two tendencies altered the balance of power both among states and between ruling groups and their respective subjects, eventually provoking a breakdown of the Westphalia system in the wake of the French Revolutionary and Napoleonic Wars (Arrighi 1994: 48-52).

When Westphalian principles were reaffirmed under British hegemony in the aftermath of the Napoleonic Wars, their geopolitical scope expanded to include the settler states of North and South America that had become independent on the eve or in the wake of the French Wars. But as the geopolitical scope of Westphalian principles expanded, their substantive meaning changed radically primarily because the balance of power came to operate above rather than between states. To be sure, the balance continued to operate between states in Continental Europe, where for most of the nineteenth century the Concert of Europe and the shifting of alliances among the Continental powers ensured that none of them would become so strong as to dominate all the others. Globally, however, privileged access to extra-European resources enabled Britain to act as the governor rather than a cog of the mechanisms of the balance of power. Moreover, massive tribute from its Indian empire enabled Britain to adopt unilaterally a free trade policy that, to varying degrees, "caged" all other members of the interstate system in a world-encompassing division of labor centered on Britain. Informally and temporarily but nonetheless effectively, the nineteenth-century system of juridically sovereign states was factually governed by Britain on the strength of its world-encompassing networks of power (Arrighi 1994: 52-5).

While the balance of power in the 150 years following the Peace of Westphalia was reproduced through an endless series of wars, Britain's governance of the balance of power after the Peace of Vienna produced, in Polanyi's words, "a phenomenon unheard of in the annals of Western civilization, namely, a hundred years' [European] peace--1815-1914" (1957: 5). Peace, however, far from containing, gave a new great impulse to the interstate armament race and to the broadening and deepening of European expansion in the non-European world. From the 1840s onwards, both tendencies accelerated rapidly into a self-reinforcing cycle whereby advances in military organization and technology sustained, and were sustained by economic and political expansion at the expense of the peoples and polities still excluded from the benefits of Westphalian sovereignty (McNeill 1982: 143).

The result of this self-reinforcing cycle was what William McNeill calls "the industrialization of war," a consequent new major jump in the human and financial costs of war-making, the emergence of competing imperialisms, and the eventual breakdown of Britain's nineteenth-century world order, along with widespread violations of Westphalian principles. When these principles were once again reaffirmed under US hegemony after the Second World War, their geopolitical scope became universal through the decolonization of Asia and Africa. But their substance was curtailed further.

The very idea of a balance of power that operates between rather than above states and ensures their factual sovereign equality--an idea that had already become a fiction under British hegemony--was discarded even as fiction. As Anthony Giddens (1987: 258) has noted, US influence upon shaping the new global order both under Wilson and under Roosevelt "represented an attempted incorporation of US constitutional prescriptions globally rather than a continuation of the balance of power doctrine." In an age of industialized warfare and increasing centralization of politico- military capabilities in the hands of a small and dwindling number of states, that doctrine made little sense either as a description of actual relationships of power among the members of the globalizing interstate system or as a prescription for how to guarantee the sovereignty of states. The "sovereign equality" upheld in the first paragraph of Article Two of the United Nations for all its members was thus "specifically supposed to be legal rather than factual--the larger powers were to have special rights, as well as duties, commensurate with their superior capabilities" (Giddens 1987: 266).

The enshrining of these special rights in the charter of the United Nations institutionalized for the first time since Westphalia the idea of a suprastatal authority and organization that restricted juridically the sovereignty of all but the most powerful states. These juridical restrictions, however, paled in comparison with factual restrictions imposed by the two preeminent state powers--the United States and the USSR--on their respective and mutually recognized "spheres of influence." The restrictions imposed by the USSR relied primarily on military-political sources of power and were regional in scope, limited as they were to its Eastern European satellites. Those imposed by the United States, in contrast, were global in scope and relied on a far more complex armory of resources.

The far-flung network of quasi-permanent overseas bases maintained by the United States in the Cold War era was, in Krasner's words, "without historical precedent; no state had previously based its own troops on the sovereign territory of other states in such extensive numbers for so long a peacetime period" (1988:21). This US-centric, world-encompassing politico-military regime was supplemented and complemented by the US-centric world monetary system instituted at Bretton Woods. These two interlocking networks of power, one military and one financial, enabled the United States at the height of its hegemony to govern the globalized system of sovereign states to an extent that was entirely beyond the horizons, not just of the Dutch in the seventeenth century, but of Imperial Britain in the nineteenth century as well.

In short, the formation of ever more powerful governmental complexes capable of leading the modern system of sovereign states to its present global dimension has also transformed the very structure of the system by gradually destroying the balance of power on which the sovereign equality of the system's units originally rested. As juridical statehood became universal, most states were deprived either de jure or de facto of prerogatives historically associated with national sovereignty. Even powerful states like former West Germany and Japan have been described as "semisovereign" (Katzenstein 1987, Cumings 1997). And Robert Jackson (1990: 21) has coined the expression "quasi-states" to refer to ex-colonial states that have won juridical statehood but lack the capabilities needed to carry out the governmental functions traditionally associated with independent statehood. Semisovereignty and quasi-statehood are the outcome of long term trends of the modern world system and both materialized well before the global financial expansion of the 1970s and 1980s. What happened in the 1970s and 1980s is that the capacity of the two superpowers to govern interstate relations within and across their respective spheres of influence lessened in the face of forces which they had themselves called forth but could not control.

The most important among these forces originated in the new forms of world economic integration that grew under the carapace of US military and financial power. Unlike the nineteenth-century world economic integration instituted by and centered on Britain, the system of global economic integration instituted by and centered on the United States in the Cold War era did not rest on the unilateral free trade of the hegemonic power and on the extraction of tribute from an overseas territorial empire. Rather, it rested on a process of bilateral and multilateral trade liberal- ization closely monitored and administered by the United States, acting in concert with its most important political allies, and on a global transplant of the vertically integrated organizational structures of US corporations (Arrighi 1994: 69-72).

Administered trade liberalization and the global transplant of US corporations were meant to maintain and expand US world power, and to reorganize interstate relations so as to contain, not just the forces of Communist revolution, but also the forces of nationalism that had torn apart and eventually destroyed the nineteenth-century British system of global economic integration. In the attainment of these objectives, as Robert Gilpin (1975: 108) has underscored with reference to US policy in Europe, the overseas transplant of US corporations had priority over trade liberalization. In Gilpin's view, the relationship of these corpo- rations to US world power was not unlike that of joint-stock chartered companies to British power in the seventeenth and eighteenth centuries: "The American multinational corporation, like its mercantile ancestor, has performed an important role in the maintainance and expansion of the power of the United States" (1975: 141-2).

This is true but only up to a point. The global transplant of US corporations did maintain and expand the world power of the United States by establishing claims on the incomes, and controls over the resources, of foreign countries. In the last resort, these claims and controls constituted the single most important difference between the world power of the United States and that of the USSR and, by implication, the single most important reason why the decline of US world power, unlike that of the USSR, has proceeded gradually rather than catastrophically (for an early statement of this difference, see Arrighi 1982: 95-7).

Nevertheless, the relationship between the transnational expansion of US corporations and the maintenance and expansion of the power of the US state has been just as much one of contradic- tion as of complementarity. For one thing, the claims on foreign incomes established by the subsidiaries of US corporations did not translate into a proportionate increase in the incomes of US residents and in the revenues of the US government. On the contrary, precisely when the fiscal crisis of the US "warfare- welfare state" became acute under the impact of the Vietnam War, a growing proportion of the incomes and liquidity of US corporations, instead of being repatriated, flew to offshore money markets. In the words of Eugene Birnbaum of Chase Manhattan Bank, the result was "the amassing of an immense volume of liquid funds and markets- -the world of Eurodollar finance--outside the regulatory authority of any country or agency" (quoted in Frieden 1987: 85; emphasis in the original).

Interestingly enough, the organization of this world of Eurodollar finance--like the organizations of the sixteenth-century Genoese business diaspora and of the Chinese business diaspora from pre-modern to our own times--occupies places but is not defined by the places it occupies. The so-called Eurodollar market--as Roy Harrod (1969: 319) characterized it well before the arrival of the information super-highway--"has no headquarters or buildings of its own.... Physically it consists merely of a network of telephones and telex machines around the world, telephones which may be used for purposes other than Eurodollar deals." This space-of-flows falls under no state jurisdiction. And although the US state still has some privileged access to its services and resources, this privileged access has come at the cost of an increasing subordination of US policies to the dictates of non-territorial high finance.

Equally important, the transnational expansion of US corpo- rations has called forth competitive responses in old and new centers of capital accumulation that weakened, and eventually reversed, US claims on foreign incomes and resources. As Alfred Chandler (1990: 615-16) has pointed out, by the time Servan- Schreiber called upon his fellow Europeans to stand up to the "American Challenge"--a challenge that in Servan-Schreiber's view was neither financial nor technological but "the extension to Europe of an organization that is still a mystery to us"--a growing number of European enterprises had found effective ways and means of meeting the challenge and of themselves becoming challengers of the long-established US corporations even in the US market. In the 1970s, the accumulated value of non-US (mostly Western European) foreign direct investment grew one-and-half times faster than that of US foreign direct investment. By 1980, it was estimated that there were over 10,000 transnational corporations of all national origins, and by the early 1990s more than three times as many (Stopford and Dunning 1983: 3; Ikeda 1996: 48).

This explosive growth in the number of transnational corpo- rations was accompanied by a drastic decrease in the importance of the United States as a source, and an increase in its importance as a recipient, of foreign direct investment. The transnational forms of business organization pioneered by US capital, in other words, had rapidly ceased to be a "mystery" for a large and growing number of foreign competitors. By the 1970s, Western European capital had discovered all its secrets and had begun outcompeting US corporations at home and abroad. By the 1980s, it was the turn of East Asian capital to outcompete both US and Western European capital through the formation of a new kind of transnational business organization--an organization that was deeply rooted in the region's gifts of history and geography, and that combined the advantages of vertical integration with the flexibility of informal business networks (Arrighi, Ikeda and Irwan 1993).

No matter which particular fraction of capital won, the outcome of each round of the competitive struggle was a further increase in the volume and density of the web of exchanges that linked people and territory across political jurisdictions both regionally and globally. This tendency has involved a fundamental contradiction for the global power of the United States--a contradiction which has been aggravated rather than mitigated by the collapse of Soviet power and the consequent end of the Cold War. On the one hand, the US government has become prisoner of its unprecedented and, with the collapse of the USSR, unparalleled global military capabilities. These capabilities remain essential, not just as a source of "protection" for US business abroad, but also as the main source of the lead of US business in high technology both at home and abroad. On the other hand, the disappearance of the Communist "threat" has made it even more difficult than it already was for the US government to mobilize the human and financial resources needed to put to effective use or just maintain its military capabilities. Hence the divergent assessments of the actual extent of US global power in the post- Cold War era.

"Now is the unipolar moment," a triumphalist commentator crows. "There is but one first-rate power and no prospect in the immediate future of any power to rival it." But a senior U.S. foreign policy official demurs: "We simply do not have the leverage, we don't have the influence, the inclination to use military force. We don't have the money to bring the kind of pressure that will produce positive results any time soon." (Ruggie 1994, 553)


The true peculiarity of the present phase of financial expansion of world capitalism lies in the difficulty of projecting past evolutionary patterns into the future. In all past financial expansions, the old organizing centers' declining power was matched by the rising power of new organizing centers capable of surpassing the power of their predecessors not just financially but militarily as well. This has been the case of the Dutch in relation to the Genoese, of the British in relation to the Dutch, and of the US in relation to the British.

In the present financial expansion, in contrast, the declining power of the old organizing centers has been associated not with a fusion of a higher order but with a fission of military and financial power. While military power has become centralized further in the hands of the United States and its closest Western allies, financial power has become dispersed among a motley ensemble of territorial and non-territorial organizations which, de facto or de jure, cannot even remotely aspire to match the global military capabilities of the United States. This anomaly signals a fundamental break with the evolutionary pattern that has characterized the expansion of world capitalism over the last 500 years. Expansion along the established path is at an impasse--an impasse which is reflected in the widespread feeling that modernity or even history is coming to an end, that we have entered a phase of turbulence and systemic chaos with no precedent in the modern era (Rosenau 1990: 10; Wallerstein 1995: 1, 268), or that a "global fog" has descended upon us as we blindly tap our way into the third millenium (Hobsbawm 1994: 558-9). While the impasse, the turbulence and the fog are all real, a closer look at the extraordinary economic expansion of the East Asian region (henceforth understood to include Southeast Asia) can give some insights into the truly new kind of world order that may be emerging at the edges of the impending systemic chaos.

In a recent comparative analysis of rates of economic growth since the mid-1870s, the Union Bank of Switzerland found "nothing comparable with the [East] Asian economic growth experience of the last three decades." Other regions grew as fast during wartime dislocations (e.g. North America during the Second World War) or following such dislocations (e.g. Western Europe after the Second World War). But "the eight-percent plus average annual income growth set by several [East] Asian economies since the late 1960s is unique in the 130 years of recorded economic history." This growth is all the more remarkable in having been recorded at a time of overall stagnation or near stagnation in the rest of the world, and in having "spread like a wave" from Japan to the Four Tigers (S. Korea, Taiwan, Singapore and Hong Kong), from there to Malasya and Thailand, and then on to Indonesia, China and, more recently, to Vietnam (Union Bank of Switzerland 1996: 1).

Even more impressive have been the advances of East Asia in high finance. The Japanese share of the total assets of Fortune's top fifty banks in the world increased from 18 percent in 1970, to 27 percent in 1980, to 48 percent in 1990 (Ikeda 1996). As for foreign exchange reserves, the East Asian share of the top ten central banks' holdings increased from 10 percent in 1980 to 50 percent in 1994 (Japan Almanac 1993 and 1997). Clearly, if the United States no longer has "the money to bring the kind of pressure that will produce positive results"--as the previously quoted senior US foreign policy official deplored-- East Asian states, or at least some of them, have all the money they need to remain immune from the kind of pressure that is driving states all over the world--the United States included--to yield to the dictates of increasingly mobile and volatile capital (see section II, above).

Ironically, this partial but nonetheless highly significant reversal of the economic and financial fortunes of the United States on the one side, and of East Asian states on the other, originated in major US encroachments on the sovereignty of East Asian states at the onset of the Cold War. The unilateral military occupation of Japan in 1945 and the division of the region in the aftermath of the Korean War into two antagonistic blocs created, in Bruce Cumings' words, a US "vertical regime solidified through bilateral defense treaties (with Japan, South Korea, Taiwan and the Philippines) and conducted by a State Department that towered over the foreign ministries of these four countries."

All became semisovereign states, deeply penetrated by U.S. military structures (operational control of the South Korean armed forces, Seventh Fleet patrolling of the Taiwan Straits, defense dependencies for all four countries, military bases on their territories) and incapable of independent foreign policy or defense initiatives.... There were minor demarches through the military curtain beginning in the mid-1950s, such as low levels of trade betwen Japan and China, or Japan and North Korea. But the dominant tendency until the 1970s was a unilateral U.S. regime heavily biased toward military forms of communication. (Cumings 1997: 155)

Within this "unilateral US regime" the United States special- ized in the provision of protection and the pursuit of political power regionally and globally, while its East Asian vassal states specialized in trade and the pursuit of profit. This division of labor has been particularly important in shaping US-Japanese relations throughout the Cold War era right up to the present. As Franz Schurmann (1974: 143) wrote at a time when the spectacular economic ascent of Japan had just begun, "[f]reed from the burden of defense spending, Japanese governments have funneled all their resources and energies into an economic expansionism that has brought affluence to Japan and taken its business to the farthest reaches of the globe." Japan's economic expansion, in turn, generated a "snowballing" process of concatenated, labor-seeking rounds of investment in the surrounding region, which gradually replaced US patronage as the main driving force of the East Asian economic expansion (Ozawa 1993: 130-1; Arrighi 1996: 14-16).

By the time this snowballing process took off, the militaristic US regime in East Asia had begun to unravel as the Vietnam War destroyed what the Korean War had created. The Korean War had instituted the US-centric East Asian regime by excluding Mainland China from normal commercial and diplomatic intercourse with the non-communist part of the region, through blockade and war threats backed by "an archipelago of American military installations" (Cumings 1997: 154-5). Defeat in the Vietnam War, in contrast, forced the United States to readmit Mainland China to normal commercial and diplomatic intercourse with the rest of East Asia, thereby broadening the scope of the region's economic integration and expansion (Arrighi 1996).

This outcome transformed without eliminating the previous imbalance of the distribution of power resources in the region. The rise of Japan to industrial and financial powerhouse of global significance transformed the previous relationship of Japanese political and economic vassalage vis-a-vis the United States into a relationship of mutual vassalage. Japan continued to depend on the United States for military protection; but the reproduction of the US protection-producing apparatus came to depend ever more critically on Japanese finance and industry. At the same time, the reincorporation of Mainland China in regional and global markets brought back into play a state whose demographic size, abundance of labor resources, and growth potential surpassed by a good margin that of all other states operating in the region, the United States included. Within less than twenty years after Richard Nixon's mission to Beijing, and less than fifteen after the formal reestablishment of diplomatic relations between the United States and the PRC, this giant "container" of labor power already seemed poised to become again the powerful attractor of means of payments it had been before its subordinate incorporation in the Eurocentric world system.

If the main attraction of the PRC for foreign capital has been its huge and highly competitive reserves of labor, the "matchmaker" that has facilitated the encounter of foreign capital and Chinese labor is the Overseas Chinese capitalist diaspora.

Drawn by China's capable pool of low-cost labor and its growing potential as a market that contains one-fifth of the world's population, foreign investors continue to pour money into the PRC. Some 80% of that capital comes from the Overseas Chinese, refugees from poverty, disorder, and communism, who in one of the era's most piquant ironies are now Beijing's favorite financiers and models for moderniza- tion. Even the Japanese often rely on the Overseas Chinese to grease their way into China. (Kraar 1994: 40)

In fact, Beijing's reliance on the Overseas Chinese to ease Mainland China's reincorporation in regional and world markets is not the true irony of the situation. As Alvin So and Stephen Chiu (1995: ch. 11) have shown, the close political alliance that was established in the 1980s between the Chinese Communist Party and Overseas Chinese capitalists made perfect sense in terms of their respective pursuits. For the alliance provided the Overseas Chinese with extraordinary opportunities to profit from commercial and financial intermediation, while providing the Chinese Communist Party with a highly effective means of killing two birds with one stone: to upgrade the domestic economy of Mainland China and at the same time to promote national unification in accordance to the "One Nation, Two Systems" model.

The true irony of the situation is that one of the most conspicuous legacies of nineteenth-century Western encroachments on Chinese sovereignty is now emerging as a powerful instrument of Chinese and East Asian emancipation from Western dominance. An Overseas Chinese diaspora had long been an integral component of the indigenous East Asian tribute-trade system centered on imperial China. But the greatest opportunities for its expansion came with the subordinate incorporation of that system within the structures of the Eurocentric world system in the wake of the Opium Wars. Under the US Cold War regime, the diaspora's traditional role of commercial intermediation between Mainland China and the surrounding maritime regions was stifled as much by the US embargo on trade with the PRC as by the PRC's restrictions on domestic and foreign trade. Nevertheless, the expansion of US power networks and Japanese business networks in the maritime regions of East Asia, provided the diaspora with plenty of opportunities to exercise new forms of commercial intermediation between these networks and the local networks it controlled. And as restrictions on trade with and within China were relaxed, the diaspora quickly emerged as the single most powerful agency of the economic reunification of the East Asian regional economy (Hui 1995).

It is too early to tell what kind of political-economic formation will eventually emerge out of this reunification and how far the rapid economic expansion of the East Asian region can go. For what we know, the present rise of East Asia to most dynamic center of processes of capital accumulation on a world scale may well be the preamble to a recentering of the regional and world economies on China as they were in pre-modern times. But whether or not that will actually happen, the main features of the on-going East Asian economic renaissance are sufficiently clear to provide us with some insights into its likely future trajectory and implications for the global economy at large.

First, the renaissance is as much the product of the contradictions of US world hegemony as of East Asia's geo- historical heritage. The contradictions of US world hegemony concern primarily the dependence of US power and wealth on a path of development characterized by high protection and reproduction costs--that is, on the formation of a world-encompassing, capital- intensive military apparatus on the one side, and on the diffusion of wasteful and unsustainable patterns of mass consumption on the other. Nowhere have these contradictions been more evident than in East Asia. Not only did the Korean and Vietnam wars reveal the limits of the actual power wielded by the US warfare-welfare state. Equally important, as those limits tightened and expansion along the path of high protection and reproduction costs began to yield decreasing returns and to destablize US world power, East Asia's geo-historical heritage of comparatively low reproduction and protection costs gave the region's governmental and business agencies a decisive competitive advantage in a global economy more closely integrated than ever before. Whether this heritage will be preserved remains unclear. But for the time being the East Asian expansion has been the tracklaying vehicle of a developmental path far more economical and sustainable than the US path.

Second, the renaissance has been associated with a structural differentiation of power in the region that has left the United States in control of most of the guns, Japan and the Overseas Chinese in control of most of the money, and the PRC in control of most of the labor. This structural differentiation--which has no precedent in previous hegemonic transitions--makes it extremely unlikely that any single state operating in the region, the United States included, will acquire the capabilities needed to become hegemonic regionally and globally. Only a plurality of states acting in concert with one another has any chance of bringing into existence an East Asian-based new world order. This plurality may well include the United States and, in any event, US policies towards the region will remain as important a factor as any other in determining whether, when and how such a regionally-based new world order would actually emerge.

Third, the process of economic expansion and integration of the East Asian region is a process structurally open to the rest of the global economy. In part, this openess is a heritage of the interstitial nature of the process vis-a-vis the networks of power of the United States. In part, it is due to the important role played by informal business networks with ramifications throughout the global economy in promoting the integration of the region. And in part, it is due to the continuing dependence of East Asia on other regions of the global economy for raw materials, high technology, and cultural products. The strong forward and backward linkages that connect the East Asian regional economy to the rest of the world augur well for the future of the global economy, assuming that the economic expansion of East Asia is not brought to a premature end by internal conflicts, mismanagement, or US resistance to the loss of power and prestige, though not necessarily of wealth and welfare, that the recentering of the global economy on East Asia entails.

Finally, the embedment of the East Asian economic expansion and integration in the region's geo-historical heritage means that the process cannot be replicated elsewhere with equally favorable results. Adaptation to the emergent East Asian economic leadership on the basis of each region's own geo-historical heritage--rather than misguided attempts at replicating the East Asian experience out of context, or even more misguided attempts at reaffirming Western supremacy on the basis of a flawed assessment of the actual power wielded by the US military-industrial complex--is the most promising course of action for non-East Asian states. Whether this is a realistic expectation is, of course, an altogether different matter.


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